Conclusory Statements that Certain Employees Direct, Control, or Coordinate a Corporation’s Activities Are Insufficient to Prove the Corporation’s Principal Place of Business

In this action, while denying the plaintiff’s motion to remand, a district court in California found that the plaintiff must prove beyond conclusory statements that certain employees of a corporation direct, control, or coordinate its activities to establish the corporation’s principal place of business.

The sole issue on the motion to remand was the principal place of business of three defendant LLCs, each of which operated a single restaurant in California, but were incorporated in Arizona, where their co-defendant parent company was headquartered and incorporated. The plaintiff filed their putative class action in Los Angeles Superior Court, alleging that the defendants routinely violated California labor laws relating to the employment of their servers, waiters, and waitresses at restaurants in California. The defendants were four LLCs doing business in California: FRC True Food SMP, LLC; FRC True Food SDFV, LLC; FRC True Food NBFI, LLC (collectively “True Food LLCs”); and Fox Restaurant Concepts, LLC (“FRC”), the parent company of each of the True Food LLCs. FRC was headquartered and incorporated in Arizona, while each True Food LLC was incorporated in Arizona and operated a single restaurant in California. After the defendants removed the action to federal court under CAFA, the plaintiff moved to remand the action based on CAFA’s “local controversy” and “home state” exceptions. Neither party disputed that the jurisdictional requirements of CAFA were met, nor any element of the local controversy or home state exceptions, except the principal place of business of the True Food LLCs.

Both exceptions would have been satisfied, and remand proper, if the True Food LLCs were citizens of California. The parties agreed that the True Food LLCs were unincorporated associations for the purposes of CAFA. Under CAFA, unincorporated associations are citizens of the state where they have their principal place of business and the state under whose laws they are organized. 28 U.S.C. § 1332(d)(10). As you may recall, in Hertz Corp. v. Friend, 130 S. Ct. 1181 (2010), the Supreme Court adopted the “nerve center” test for determining a corporation’s principal place of business, defining “principal place of business” as the place where a corporation’s officers direct, control, and coordinate the corporation’s activities. (Editor’s Note:See the CAFA Law Blog discussion of Hertz v.Friend’s impact on CAFA’s minimum diversity requirement, posted on March 6, 2012).

The court therefore permitted jurisdictional discovery on the location of employees responsible for directing, controlling, and coordinating the True Food LLCs’ activities. In response to plaintiff’s discovery, the defendants identified 36 individuals as “senior-level employees” of the True Food LLCs, 30 of whom were based in Arizona. Though these individuals were all employed or paid by FRC, the True Food LLCs’ parent company, the defendants argued they were nonetheless jointly employed by the True Food LLCs. The defendants also identified the general manager position as the highest ranking employee at each True Food LLC’s California restaurant location. Based on this discovery, the plaintiffs argued that the senior-level employees identified by the defendants all worked solely for FRC and made decisions on its behalf, and thus the most consequential decisions being made by the True Food LLCs could only be made by its general managers, who were based in the California restaurant locations.

The District Court, however, found that the plaintiff offered no evidence that the general manager of each restaurant was a “high-level officer” who controlled the respective True Food LLC. The court specifically cited the lack of evidence “on such basic questions as the duties or powers of the general managers, who the board members of each True Food LLC are, who can hire and fire the employees of each True Food LLC, who has the authority to sign contracts on its behalf, who sets policies concerning wage and hour issues, and who controls resources, food offerings and preparation, and management.”

Accordingly, the District Court opined that it could not find that the general managers directed, controlled, or coordinated the activities of the True Food LLCs, or that the restaurant locations also served as their headquarters. The District Court therefore ruled that the plaintiff had failed to meet her burden to establish that the True Food LLCs were California citizens, and denied the plaintiff’s motion to remand.